Obama / Xi “Summit” — Big, Big Issues

President Obama and Chinese President and General Secretary of the Communist Party Xi Jinping begin two days of “get to know you” meetings today near Palm Springs. Amidst talk of development of a new relationship, and “re-examining the premises” of our understandings, there are a number of big issues waiting to be addressed. But no one is predicting any particular outcomes and the informal format with no “deliverables” is not designed for that.

Currency

The big “bang-for-buck” economic item is currency manipulation. China keeps its currency way under market value, which gives goods made there a huge pricing advantage in world markets even before taking into account any trade violations, government subsidies, low wages and other factors. Currency is one of the causes of the tremendous trade imbalance, draining upwards toward a billion dollars each day from our economy.

China’s low currency also means that Chinese consumers face high prices on goods and services imported to their country. Where some argue that the low prices we pay for goods made in China makes up for the tremendous loss of millions of jobs and pressure on wages that result, the opposite is true for China. They already have low-paying jobs, and then after working tremendously long days in bad conditions still can’t afford to buy imported goods. Meanwhile, growth in China’s economy is slowing as the massive imbalances begin to catch up with reality. As Gordon Chang put it at The Daily Beast, “This has foreign-policy consequences because, without prosperity, the only remaining basis of the Communist Party’s legitimacy is nationalism.”

The Treasury Department is required by law to declare them a currency violator under the Omnibus Trade and Competitiveness Act of 1988, which would initiate steps to address the resulting trade imbalances. But the department continues to refuse to do this, instead regularly issuing reports that their currency is “significantly” undervalued.

It is assumed that the administration gives a priority to national security over trade, allowing China to slide on the currency manipulation in exchange for help with “tensions” in areas like dealing with North Korea, for example. But this also creates an incentive for China to create these tensions to deflect from their trade violations. There appears now to be a routine where we have “tensions” with, for example, North Korea just as issues of trade are coming to the forefront, and those tensions disappear as soon as the currency manipulation complaints or other trade issues are dropped.

Just how undervalued is China’s currency? Currently estimates are in the range of 20-40%. But investor Jim Rogers said he expects China’s currency “to appreciate 300, 400 or even 500 percent in the next 20 to 30 years.”

Other Trade Issues

Our 2012 trade deficit with China was $315 billion. This is approaching a billion dollars each day drained from our economy. If you think about what $315 billion in orders for goods would do for our economy — jobs, wages, factories, ability to pay for things like fixing bridges and educating kids, etc. — that is what this trade deficit does to our economy each year.

What is China doing with that accumulated cash? As USA Today recently put it, “As its industrial base keeps expanding, China increasingly looks to buy U.S. companies rather than invite them to operate here, such as its recent $4.7 billion purchase of Smithfield Foods Inc.”

According to the Economic Policy Institute “the rise in the U.S. trade deficit with China between 2001 and 2011 alone eliminated 2.7 million U.S. jobs, over 2.1 million (76.9 percent) of which were in manufacturing.”

Obviously our trade relationship with China is out of balance and is doing great harm to much of our country. In fact, it is the most out-of-balance trade relationship between any two countries in the history of the world. So far the trade imbalance has played out to the benefit of Wall Street and the billionaires so it does not receive the kind of “crisis” attention in Washington that other issues receive, like the “need” for corporate tax reform that lowers rates, or the terrible scandal that public employees get pensions.

Cyber Espionage

Chinese government computer hackers have been penetrating computer networks in the US for years. The result is that important trade secrets and other “intellectual property” including manufacturing techniques and client information are stolen. But the hacking extends far beyond simple economic espionage. Journalists have been intimidated, and their sources exposed. Advocacy groups are being hacked. Even both 2008 presidential campaigns.

Most seriously Chinese hackers are also penetrating essential infrastructure networks – gaining the ability to inflict damage by shutting down the power grid, opening up dams, etc. should the decide to do so.

Beyond this our military, contractor and subcontractor computers have also been penetrated, with designs of weapons systems stolen, slong with other information that is essential to national security.

Human Rights

Liu Xiaobo, the winner of the Nobel Peace Prize in 2010, is in a Chinese jail, convicted of “inciting subversion of state power” because he called for an end to single-party rule by the Communist Party. Cases like this are described by blind activist Chen Guangcheng as “the tip of the iceberg among hundreds of thousands of cases.”

On this week’s anniversary of the 1989 Tiananmen Square massacre of democracy advocates, China’s government censored internet searches even including the words “today” and “tomorrow.”

Constructive Or Confrontational?

While Xi Jinping is new to office, in a political system that does not give ultimate power to individuals there is reason to believe that a personal relationship between the two leaders will hold value. According to the Washington Post, Xi “was given control of the presidency, the Communist Party and the military simultaneously when he took office in March. His predecessor, Hu Jintao, had to wait almost two years before all three sources of Chinese power were under his command.” So a “get to know you” meeting has merit as a path to developing a strong relationship with reduced possibilities for confrontation.

But the Chinese perspective is very different from the American one. China sees itself as a country and is much more nationalistic than America. It defends its own interests as a country. It plans as a country. It has industrial policy as a country. And they approach our relationship that way, while the dominant conservative ideology keeps us from responding as a country.

The Chinese have indicated they want to develop a constructive rather than confrontational relationship. China’s Assistant Foreign Minister Zheng Zeguang said they want to “live in harmony, cooperating with mutual benefit.” But from some in China the viewpoint is that there won’t be any conflict as long as “America can accept China as No. 1”.

About Dave Johnson

Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational applications of personal computers. More recently he helped co-found a company developing desktop systems to validate carbon trading in the US.